How does a PE fund work? structure of a PE fund most PE funds are set up as closed-end limited Partnerships and operate as blind pool Vehicles when investors have no say in the choice of individual Investments That a fund will invest in Closed-end funds have a finite lifespan and investors need to commit capital for the funds entire term which usually is 10 years without having any rights to withdraw earlier.
the parties involved in a limited partnership PE fund structure are private Equity Firm a PE firm is a company with expertise in executing a venture growth or buyout investment strategy.
It raises an advises a fund which if successful over time becomes a series of funds generally through two separate legal entities the general partnership and the quote unquote investment manager members of a PE firm typically hold all the key directorships and other decision-making positions of both the GP and the investment manager for every fund raised by The Firm.
Establishing these separate legal entities protects the PE firm from liabilities and claims against the PE fund.
Limited partners LPS or investors contribute nearly all of the capital to appe fundraised. They are passive investors with liability limited to the amount of capital. They commit to the fund investors active in PE include Pension funds endowments insurance companies Banks corporations family offices and fund of funds.
LPS are purely Financial investors with no involvement in the operation or management of the fund. They are legally committed to provide capital for Investments when they are drawn down or called by the PE fund and they receive distributions of capital upon the sale of the funds Investments.
General partner the GP is responsible for all aspects of managing the fund and has a fiduciary duty to act uniquely in the interest of the funds investors. It will issue Capital calls to LPS and make all investment decisions for the fund as per the limited partnership agreement, which sets out its mandate towards LPS.
The GP often delegates some of the management function to the investment management firm, but remains fully liable for the debt and liabilities of the fund and is obligated to invest as per the agreed mandate with LPS.
A GP comprised of senior partners and professionals will also invest a small amount into the fund anywhere between one and 10% investment manager the investment manager or investment advisor is responsible for conducting The Daily Business of the fund. They charge a management fee to the private Equity Fund often around 2% of the portfolio value during the investment period of the fund.
This fee typically decreases often agreed investment period which usually is defined as halfway through the life of the fund.
The investment manager evaluates investment opportunities executes the Acquisitions monitors, the Investments helps portfolio companies grow in value through various initiatives such as m&a or strategic actions and manages the funds audit and Reporting requirements.
Portfolio company or Investments these are companies that the PE Fund invests in usually they are about 10 Investments held within a PE fund which together are referred to as the Investment Portfolio.
Portfolio companies are typically held for three to seven years during which time the investment manager will attempt to increase the value through improved operational performance before finally trying to sell these Investments the outcome after selling portfolio companies will seal the verdict on how successful a particular PE fund has been based on the returns annualized returns and money multiple of returned Capital divided by invested Capital to investors. Normally portfolio companies are held by newly created legal entities that are structured as quote unquote on Shore or located in the same jurisdiction as the investment or the targets headquarters for regulatory Bank financing and tax reasons.
He firms therefore have two facets to their business model on the one side. They have a duty and a mandate as defined by the lp agreement towards their investors.
On the other side they have to evaluate and oversee businesses to make them good Investments.
Establishing a reputation of professional conduct and the ability to add value will help a fund become successful and provide easier access to Future fundraising and investment opportunities.
